Red Hat in Big Blue's Space

August 03, 2004

By Steve Hamm The open-source software movement makes strange bedfellows because of the way it blends the goals of volunteer programmers and some of the tech industry's mightiest companies. But things got a little stranger than usual on Aug. 3 when Red Hat (RHAT), the leading distributor of Linux, announced it will start selling application-server software. That puts it in competition -- of sorts -- with one of its biggest allies, IBM (IBM), a major reseller of Red Hat Enterprise Linux.

Will the two companies be able to manage this new wrinkle in their relationship? There's plenty to suggest they can. After all, the tech industry is full of "coopetition" -- where companies compete in one area while cooperating in others. "There are some conflicts, but at the end of the day, I think they'll be able to cope," says analyst John Enck of market researcher Gartner. Still, if these two can't work out their differences smoothly, this could slow the momentum of Linux, which ranks No. 2 behind Microsoft's (MSFT) Windows as the top software for server computers.

DOWNWARD PRESSURE. Both sides claim it's no big deal. Red Hat says it only went into the business in response to requests from its customers. Application servers are used to run Web-based applications and to help integrate one application with another. Red Hat stresses that its application server is a "light-weight, low-cost" product, with an $85-per-month subscription price. Paul Cormier, executive vice-president for engineering at Red Hat, points out that the two companies cooperated to make sure their offerings work well together. "It's not a rift. We're closer than ever," he insists.

IBM sells a higher-priced application server, called WebSphere, that's packed with extra features. Pricing ranges from $2,000 to $15,000 per microprocessor -- depending on the version of software that's being used. "We still see it as cooperation between us and Red Hat," says IBM spokesman Steven Eisenstadt.

Still, any application server sold by Red Hat is potentially a sale missed by IBM. And by selling at a low annual subscription price, Red Hat puts downward pressure on IBM's pricing to some degree.

INTERESTING VIEWING. Red Hat's move may push IBM in the direction of No. 2 Linux distributor Novell (NOVL), which sells a version of Linux from Europe's SuSE (see BW Online, 8/4/04, "Don't Quote My Blog on That"). Already, IBM is focused on reselling SuSE with its mainframes and servers running its own Power5 processors -- while offering both Red Hat and SuSE on servers running Intel's (INTL) processors.

So is this just a bump in the road or the beginning of a breakup? Probably just a bump, although Microsoft may well be hoping it's more than that. And it's sure going to be interesting watching to see how it turns out. Hamm is a senior writer for BusinessWeek in New York